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Economics (MindTap Course List)

13th Edition
Roger A. Arnold
ISBN: 9781337617383

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BuyFindarrow_forward

Economics (MindTap Course List)

13th Edition
Roger A. Arnold
ISBN: 9781337617383
Textbook Problem

What does the nominal interest rate equal, given the following?

a. Real interest rate = 3 percent; expected inflation rate = 1 percent

b. Real interest rate = 5 percent; expected inflation rate = −3 percent

(a)

To determine

The nominal interest rate.

Explanation

It is given that the real interest rate is 3 percent, and the expected inflation rate is 1 percent.

The nominal interest rate can be calculated using Equation (1) as follows:

Nominal interest rate=Real interest rate+Expected rate of inflation (1)

(b)

To determine

The nominal interest rate.

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